Market regulation

The revival of China's stock market from five years of bearish returns is the result of a series of formidable securities reforms by the government to bring the market more in line with international norms. Just around the Beijing Focus Hall, where the China Securities Regulatory Commission (CSRC) is located, much had happened in the past few years.

Starting in 2004, the CSRC began to introduce a series of innovations improving the corporate governance of listed companies, tightening controls on the brokerages, and introducing new investment products. The fundamental change came in May 2005 when the government launched the long-awaited "securities split reform" to transfer State-owned non-tradable shares to tradable ones.

By November 19 of this year, 1,161 listed companies out of the total 1,300 had completed their securities reform. Their market capitalization accounts for 96 per cent of the total, according to CSRC statistics.

The implementation of the reform fundamentally shifted the A-share market from a gaming house to a normally functioning market based on true value.

Booming securities industry

With the revival of the stock market, securities firms are enjoying good times. However, it will take at least one year for foreign capital to partner with these firms.

The Chinese government recently closed the door on new partnerships by preventing any more overseas firms from buying domestic brokerages. It is unlikely to allow any new purchases by overseas firms until 2007, when the reorganization of China's long-troubled securities sector is expected to end and local firms are strong enough to handle international competition.

Foreign firms are restricted to owning 33 per cent of an investment banking venture and 20 per cent of a brokerage.

To operate an investment bank in China, foreign firms require a licence to underwrite stock and bond sales. They need a separate brokerage licence to trade securities. Only Goldman Sachs, French lender BNP Paribas, and CLSA, Asia's biggest brokerage, currently have underwriting licences. Goldman Sachs is the only one to possess a brokerage licence.

Morgan Stanley, Merrill Lynch, and JP Morgan Chase have all indicated that they want to establish local firms.

(China Daily 12/09/2006 page5)

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